Tax season is a tough time for most of us. It needs vigorous planning, consistency, and consumes a lot of time as well. And, according to accountants and tax professionals, if your aim is to reduce tax season stress, you must finish preparing by the end of the year. If you are a self-preparer, there are a number of reasons that state you need to seek professional advice at least once and assistance from a professional tax suite such as Drake hosting. There are a number of things a CPA or tax professional can guide you through, but first, you need to understand your tax liability in depth.
Here are 6 things your accountant wants you to know about your tax liability:
Your Personal And Business Tax Liability Is Not The Same
Most people confuse their personal taxes with business taxes, but the two are separate entities and care must be taken when identifying your tax liabilities. When faced with uncertainty, the best thing to do is to look for advice from someone who has adequate experience in the field.
Your business structure determines if you’ll face double or single taxation. A C-corp, for instance, will first be subjected to tax on the overall profits. The post-tax profit/income is then divided among shareholders as dividends. These dividends when combined with the shareholders’ personal income again form a part of their income tax return. Thus, C-corps face double taxation. On the other hand, businesses apart from C-corps, i.e a pass-through entity only faces single taxation.
You Cannot Fully Deduct Your Mortgage Interest
Deductions are great for minimizing the tax due. You can simply itemize and claim a tax deduction on Schedule A of your form 1040. But, if your plan is to seek a home loan and claim a deduction later, it is best to calculate the number of deductions that can be claimed based on your gross income. The reason being, you cannot fully deduct your mortgage interest. To avoid making a rash decision, invest in a smart tax software hosting solution such as Drake tax hosting and also seek advice from a professional tax preparer before the year-end.
Tax Credits and Tax Deductions Are Not The Same Things
A lot of people confuse tax credits with tax deductions. Although the two may sound similar, understanding the differences can help you claim both and eventually reduce your tax due. Where a tax credit reduces your tax liability, a tax deduction will shrink your taxable income. For example, if you have a $1000 tax liability, a $50 tax credit will reduce your tax liability to $950, dollar-by-dollar. Whereas, if your income is $10000, a $500 tax deduction will reduce your taxable income to $9500. Claiming both is important if your aim is to keep more of your hard-earned income in your pockets.
Tax Laws Can Also Change
Just as the government changes, tax laws observe a change too. In fact, most tax cuts come with an expiration date. If you are resting assured that you’ll be able to claim a certain tax cut in the approaching tax season, you may be in for a surprise. To avoid being flabbergasted later, keep yourself up-to-date with the changing tax laws. Talking to a tax professional in the year-end can also help keep you informed.
High-Income Earners Have To Pay A Higher Tax
Decades ago, the high-income earners could easily escape from paying heavy taxes. As a result, in the year 1969, AMT (Alternative Minimum Tax) was introduced which reduced the tax benefits enjoyed by a certain number of taxpayers. The reason why AMT was needed is that certain taxes are not included in the taxable income of high-income earners, causing them to pay a significantly smaller amount of taxes than they were supposed to. With AMT in place, taxpayers need to calculate their taxes based on the AMT income. If unsure, your tax professional can assist you in identifying if you owe the government an AMT or not.
You Cannot Change Your Tax Payment Due Date
Not everyone is able to file their taxes before the due date. April 15th may be falling on a weekend, some people may not be in the country during the tax season, some may be having a complicated tax situation that needs time to be resolved, or they may need more time to get their documents in order. Whatever the reason may be for needing an extension, it doesn’t imply that your due date has been shifted. You still owe the government taxes on the due date itself. This is why the IRS as well as the tax professionals profusely advice taxpayers to get their tax situation in order by the end of the year to avoid any unwanted delays later.
Planning the taxes is always beneficial. It saves you the hustle of gathering important documents, making tax filing mistakes, not claiming deductions, and eventually leaving your hard-earned money on the table. Hence, to maximize your tax credits and deductions, taxpayers must review their taxes before the year ends. Tax software hosting solution, your CPA, or tax preparer will help you sail through without a glitch.